Nortel posts big profit on legal gain

Quarterly revenue and gross margin come up shy

A previous version of this story gave an incorrect amount for Nortel's restructuring charge in the latest quarter. The story has been corrected.

WASHINGTON (MarketWatch) -- Nortel Networks Inc. on Thursday swung to a large second-quarter profit, boosted by a one-time gain, and repeated its forecast for stronger growth in the second half of 2006.

The Canadian vendor of communications-network equipment
NT
(NT) said net income came in at $366 million, or 8 cents a share, reversing a year-ago loss of $33 million, or a 1 cent a share.

Looking ahead, Nortel said sales would grow 10% in the third quarter and at a rate in the "high single digits" for the full year.

In early action, Nortel's U.S.-listed stock rose as much as 2% from Wednesday's closing price of $2.04.

During the latest quarter, Nortel booked a non-cash gain of $510 million related to shareholder litigation. It also incurred $45 million in restructuring charges and a loss of $10 million on an asset disposal.

Without the litigation-related gain, Nortel would have posted a small loss. On an adjusted basis, the company was expected to earn a penny a share on revenue of $2.78 billion, according to the average derived from estimates among analysts polled by Thomson First Call.

Nortel also fell short of its target of generating a 40% gross profit margin, coming in at 39%, but the company said it expects to reach that target for the full year.

The company's performance during the June quarter "underscores both the challenges and good progress we are making with Nortel's transformation," Chief Executive Mike Zafirovski said in a statement.

Zafirovski, lured away from Motorola Inc. last year, has undertaken a complete review of Nortel's operations since taking over. He's implementing a series of changes to expand in some markets, retreat in others and slash costs.

Last month, Nortel entered into a high-profile partnership with software giant Microsoft Corp.
MSFT, +1.25%
to develop Internet-related products for corporate clients that make it cheaper and easier for their employees to communicate.

Like most networkers, Nortel has suffered from dismal growth in recent years, while an accounting scandal under prior management sapped the company of valuable time and resources as it worked to clean up the mess.

Yet Nortel has cleaned up its books and refocused on new growth opportunities that could emerge as communications carriers spend billions to expand the capacity of their networks. Phone and cable operators plan to carry new video services and deliver higher Internet-access speeds.

The company ended the quarter with $1.9 billion in cash, down from $2.7 billion at the end of the first quarter. Nortel put $580 million in an escrow account on June 1 to settle class-action lawsuits from shareholders stemming from the 2004 accounting scandal.

Nortel also burned up about $108 million in cash to fund operations, a trend executives hope to reverse soon with additional cost-cutting measures and plans to focus on more lucrative markets.

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